Has the UK Supreme Court blown the whistle on the UK litigation funding market?

Baptiste Rigaudeau MCIArb, Global Steering Committee Chair, Ciarb Young Members Group (YMG), considers the Supreme Court’s recent ruling in R (PACCAR Inc and others ) v. Competition Appeal Tribunal and others (2023) UKSC 28.

On 26 July 2023, the UK Supreme Court rendered a decision in the R (PACCAR) v. Competition Appeal Tribunal case, in which it held that litigation funding agreements qualified as Damages-Based Agreements (DBAs) under English law. As such, they ought to comply with statutory requirements applicable to DBAs, for they would otherwise be unenforceable.

Litigation funding agreements are agreements by which a funder provides non-recourse financing to a litigant (most often a claiming party) in exchange for:

• a portion of the amount awarded by the relevant judicial body ruling on the claim;
• a multiple of the amount invested by the funder; or
• a combination of the two options.

This decision has prompted much debate about the contents of litigation funding agreements and the enforceability of such agreements in the UK. It also opens up the debate about the opportunity for non-UK litigation funders to increase their role in the global funding market. This article discusses the contents of the decision of the UK Supreme Court, the impact of the decision on the UK funding market, and across the Channel.

R (PACCAR) v. Competition Appeal Tribunal: Litigation funding agreements are damages-based agreements

The case revolved around the qualification of litigation funding agreements entered into in the context of a collective action brought for breaches of competition law. Specifically, the Court had to decide whether litigation funders provided “claims management services” and whether litigation funding agreements providing for the funder’s earnings with reference to a percentage of any damages recovered qualified as DBAs under Section 58AA(7) of the Courts and Legal Services Act 1990 (CLSA) and Section 419A of the Financial Services and Markets Act 2000 (FSMA). If the Court answered both questions in the affirmative, these litigation funding agreements would be, in the words of the Court, “unenforceable and unlawful since they did not comply with the formal requirements for such agreements.”

Much to the surprise of the UK legal community, the Court did answer in the affirmative, considering that these litigation funding agreements qualified as DBAs and thus needed to comply with regulatory requirements applicable under the CLSA and in the 2013 DBA Regulations. These requirements include an obligation for the litigation funding agreements to specify the reason for setting the amount of payment agreed or for a prohibition for the agreement to provide for a payment exceeding 50 % of the amount ultimately recovered by the claimant.

In doing so, the Court quashed the prior decisions of the Competition Appeal Tribunal and the Divisional Court. As a result, the litigation funding agreements in question were now deemed unenforceable.

Renegotiating litigation funding agreements in the UK

Litigation funding agreements in the UK, which set the remuneration of the funder as a percentage of the proceeds obtained by the claimant, are thus now unenforceable in the UK if they do not comply with the regulatory requirements highlighted above.

The practical consequence of the decision is that many litigation funding agreements likely to be enforced in the UK will now have to be renegotiated. Such agreements can no longer provide for the damages-based type of remuneration for the funder. Instead, they will have to provide only for the remuneration of the funder based on a multiple of the amount invested (i.e., generally 3 to 4 times the amount invested). They will also have to comply with the further requirements set out in the DBA Regulations.

Such renegotiations are in the interest of the parties, especially in ongoing cases where the claim may not be able to proceed without funding. Yet it cannot be excluded that funded parties may refuse to abide by existing litigation funding agreements and make payments due, arguing the agreements are now unenforceable.

Since funders can adopt alternative methods of remuneration in litigation funding agreements, this new state of affairs does not spell the end of litigation funding agreements in the UK. However, it is believed they will scrutinise investment opportunities even more thoroughly, given their potential earnings may now be lower.

In parallel to renegotiation efforts, UK litigation funding actors will also call for better regulation of funding agreements to clarify which arrangements are allowed. They may also request governmental action to provide an exception to the applicability of the above regulatory requirements for litigation funding agreements.

The impact on litigation funding agreements outside the UK

The decision will also have an impact on the non-UK litigation funding industry. Indeed, funders based outside the UK will likely see a surge in requests for funding. Jurisdictions like Switzerland, France, Hong Kong or Singapore do not provide for similar limitations in the contents of litigation funding agreements. 

Likewise, UK funders will likely look to fund cases outside the UK. And in case of a dispute relating to these funding agreements, awards could be enforced in the UK, given there is currently no indication that those awards would be considered as contrary to UK public policy.

Meanwhile, UK litigation funders looking to continue funding UK claims without foregoing remuneration based on the amount of recovery achieved by the claimant could also consider providing for a non-UK law as applicable law to their funding agreements. In case of a dispute between the funder and the funded party, the restriction posed by the UK Supreme Court would not be applicable, thereby mitigating the risk for the funder of not being able to enforce the funding agreement (unless and until the commented decision is recognised in the UK as public policy).

About the author: Baptiste Rigaudeau MCIArb is a dual-trained French dispute resolution lawyer based in Geneva and Paris.  He has vast experience representing clients in institutional and ad hoc arbitrations under a wide variety of arbitral rules. He also acts as arbitrator. He has also acted in court matters related to arbitrations and enforcement actions. Baptiste co-leads the Dispute Resolution group of the African Society of International Law and is a former member of the ICC Commission on the Belt and Road Initiative. Baptiste is a frequent writer and speaker on issues relating to complex disputes in Africa. Baptiste is the 2023 Global Steering Committee Chair of the Ciarb Young Members Group (YMG).